Ethics and Standards - Standard I-C: Misrepresentation
Members and Candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.
Reasoning behind Standard I-C
This Standard addresses a longstanding tendency in the investment industry, particularly among those charged with directly selling products and services to the public, to make guarantees and assurances in relation to the performance of investment products that will in fact vary in the future depending on uncertain market factors. Since a large base of clients will have varying levels of investment sophistication, there are likely to be some clients who will believe just about anything they are told. This Standard seeks to tone down the hyperbole and the rhetoric and require that the investment industry's sales and marketing efforts strive for a higher tone and avoid imperfect, improper, false or misleading statements about what an organization is and what it can do.
Financial services firms tend to develop numerous forms of communication in an effort to market their services, and the scope of this Standard is designed to broadly cover oral presentations, written materials (research reports, market letters, books, magazine articles, newspaper articles), advertisements (brochures, TV and radio commercials, direct mailings) and electronic communication (websites, chat rooms, email).
Plagiarism - Background
Investment decisions are made using a variety of financial data and information assembled in the research process: everything from corporate-issued press releases and annual reports to Wall Street brokerage research and findings and conclusions made in academic studies. This research typically forms the basis for a written report by the analyst making a recommendation.
Studying these published research reports and presentations often yields very useful economic insights. When the information or insight is of such high quality, there can be a temptation to replicate the same ideas when making investment conclusions and presenting them in a research report. The CFA Institute recognizes that analysts will borrow ideas from each other and include those ideas in written reports, but it seeks to assign proper credit to the people who originated an idea or wrote the original opinion. When copying or using someone else's words or ideas, the writer must acknowledge the source.
Since almost all CFA candidates are either college graduates or are currently enrolled in a degree program, they should be familiar with the cautions against plagiarism, given that most college degree programs involve a fair amount of researching and writing of term papers. In other words, you should find the guidelines easy to understand, and it should be straightforward to identify possible violations.
Here are a few examples of violations of Standard I-C:
- Putting your name on another analyst's research report.
- Including a large portion of another analyst's report in your own (either verbatim or with slight modifications) without crediting the original author.
- Neglecting to specifically give credit to a person who has been quoted. For example, saying "a top analyst in the field suggests..." would be a violation.
- When including financial data, you neglect to include any caveats that must be included with that data. Although this is not plagiarism, it is still a violation of the Standard.
What Conduct Is/Is Not Permitted?
Standard I-C specifically addresses the traditional view of plagiarism as an unacknowledged or unauthorized borrowing of ideas and statements from written materials, though its scope is extended to cover all forms of plagiarism, from oral presentations, to audio/visual materials, to any form of electronic media. The guiding ethical principle is to "give credit where credit is due". Given that many of these materials are explicitly copyrighted, a plagiarist exposes him or herself to violating copyright laws and facing possible civil litigation by the author or the publisher. To the members of the CFA Institute, plagiarism is an offensive and insidious practice.
Exception - Public Financial Data
Information that is already widely available to the public and distributed via a number of sources does not need to be acknowledged, according to the CFA Institute's view of plagiarism. For example, say you publish a research report on Microsoft, and you draw some basic statistical data from Yahoo! Finance, which gives the closing price of Microsoft Corporation (Nasdaq:MSFT) on April 1, 2009 as $19.13, and a dividend of $0.13 payable at the end of each quarter. In your report, you could simply state that data as fact and would not be required to explicitly give any credit to Yahoo!. However, if you copy a comment that Smith Barney's software analyst made about Microsoft's new release, it's not factual information that's part of the public domain; it's an opinion that must be acknowledged - and depending on how it is used, permission must be obtained to use the opinion.
The definition of "recognized reporting service" is a broad one, and one for which different people will have different standards. Earlier, we gave the example of using Yahoo! Finance as a source for pricing and dividend data on a company report, without acknowledging or referring to Yahoo!. To us, Yahoo! (which is internet based and free to use) can be reliable for such basics. Others will insist that Yahoo! Finance is hardly a recognized source of data, and that if one is using Yahoo!, one should acknowledge it as a source, since it does not meet the definition of "recognized reporting service" as intended by Standard I-C. Premium databases such as Standard and Poor's, Factset or Morningstar are operated by a professional staff that ensures the data is clean, and they would certainly be usable without acknowledgment under this Standard. Defining a recognized reporting service is open to interpretation.
Applying Standard I-C
Misrepresentation can take a number of forms, and it frequently can be an unintentional or careless oversight. For example, say a portfolio manager with 20 years experience leaves the firm, yet the company's website continues to highlight the average years of experience of the investment personnel, factoring in the person who just left. Who's in charge of updating the website? Whoever it is, he or she hasn't done anything about it yet - and if the information is still on the website, it's a misrepresentation and a violation of this Standard.
Other Categories of Information That Are Often Misrepresented
- Professional services - For example, small financial services firms tend to specialize in a given area, such as 401(k) planning or insurance products or tax preparation. A CFA member in charge of such a firm cannot hold himself out to be a comprehensive provider of all these financial needs.
- Professional credentials - A recent college graduate and CFA candidate passes one of the FINRA licensing exams and then holds herself out as a licensed investment advisor and portfolio management expert, printing these titles on marketing brochures.
- Expected return on an investment - A representative from a bank makes a presentation on a mutual fund that specializes in real estate, saying the following: "You want to allocate a portion of your diversified portfolio to real estate. This fund is up 98% over the last four years, and when you add that 98% gain to your account for the next four years, it will offset the stagnant cash and bond investments and allow you to reach your goals."
- Expected risk on an investment - Derivative securities of fixed income products are sometimes described as "government guaranteed" when in fact the interest portion fluctuates and will decline in periods of high interest rates. Using the idea of a guarantee masks the true risk of the security.
How to Comply
- Define firm's limits - Continually reinforce what the company can do, and what it cannot do. Provide clear guidance to sales and marketing specialists who may have an inclination to promote without restraint, if left unsupervised. The line between appropriate and inappropriate exaggerations can be subtle.
- Describe firm's services - Ensure that all contact people are discussing the firm's capabilities in a manner that is accurate and suitable.
- Identify authorized spokespeople - Who can speak on behalf of the organization? The essential message can be controlled by simply limiting who may provide it.
- Assign the support staff - These should be reliable people who will keep written and electronic materials updated and avoid unintentional misrepresentations.
- Prepare a resume - Do this for each key employee, specifying important credentials and capabilities as it relates to the company.
Plagiarism - Case Studies
As with other Standards, a number of situations could be presented on the exam that may (or may not) violate this Standard, giving rise to a number of potential questions and qualifying explanations. These are the most important to consider.
- Does an owner or managing partner have a responsibility to specifically attribute ideas or information to other members of his or her firm? The short answer: it depends. If the owner is purely acting as a representative of the firm - for example, making a presentation to a client or a prospective client - he or she can disseminate information from the firm's research department without taking the additional time to credit each individual researcher and each particular contribution someone might have made to that presentation. However, take a case where a product from a firm's quantitative research process has become recognized by the public. Let's say Bob Wilson, the owner of this firm and a CFA, is asked to appear in an industry symposium on quantitative techniques. Wilson did not actually develop the ideas or techniques himself; rather, this work was accomplished by members of the research department. However, in the context of the industry symposium, Wilson has been invited as a leading expert on quantitative research methods, and he is thus representing himself, not the firm. At the conference, he would be obligated, under Standard I-C, to give specific credit to the coworkers who were responsible for the advancement. In short, to evaluate these situations, you must determine whether the person in question is purely an agent of the firm, or is there as an expert witness, or is representing him or herself only, apart from the firm.
- If individuals are reassigned within a research department, is the new analyst obligated to acknowledge the old analyst on a published research report? In large research shops, industry coverage is often rotated periodically, yet firms often prefer to publish research with one analyst's name. This situation introduces a dilemma. For example, if a retail analyst completes all of the work on a lengthy study of-Mart, but is then reassigned to work on consumer-products companies, how should the new retail analyst (who is a CFA candidate) handle the dissemination of the Wal-Mart research? It would be improper and a violation of Standard I-C to simply send out the previous analyst's work as if the report were the work of the new analyst (i.e. simply changing the name). At the same time, firm policy asks for published research to contain one contact name. In this case, the new analyst would need to add an appropriate written acknowledgment of the previous analyst's contribution in order to comply with the Standard.
- If the initial idea for a quantitative financial model comes from an outside source, but it is tested and revised prior to being implemented, is it plagiarism to not acknowledge the source? These cases are not always so easy to judge, especially if the original quantitative model was changed - in such a case, the analyst can claim that the revised model actually represents his or her own "innovation". However, the spirit of Standard I-C is to encourage an ethic of fairness to the investment research profession. Modifying someone else's ideas to a certain extent and then passing them off as one's original discovery is a form of plagiarism and is discouraged by this Standard. In this instance, the analyst would need to give credit where credit is due by identifying the source of the new innovation and explaining how the idea originated and the measures taken to backtest or further develop or modify the concept.
- Can an employee plagiarize information from his or her own firm? If an individual uses portions of their employer's in-house publications in a way that they are acting as an agent for another individual or company, it would be considered plagiarism and a violation of Standard I-C.
This final example also pointed out that the individual "may have violated the Standard on "Duty to Employer". The CFA exam has been known to present situations with violations of multiple Standards, and it's up to the candidate to identify (on a multiple choice format) "which Standard is NOT being violatedU"U. In the case of the plagiarizer of the marketing brochures, he might be violating copyright laws (and thus, Standard I), but would not be guilty of insider trading (Standard II-A). Such problems give the CFA examiners a way to test several Standards within the context of one problem.
- Maintain research files - By keeping a comprehensive paper trail of the process by which all investment ideas are generated and the specific source of all research materials cited in preparing a report, the analyst protects him or herself from charges that these findings or ideas were plagiarized.
- Use direct quotes - Do this if an idea is going to be borrowed, and attribute the source of all directly quoted passages, as well as all statistics, charts, tables and other material that was developed and published by another source.
- Obtain permission - If the report is to be publicly disseminated, get permission to use any material that is copyrighted by a publisher. In the case of quantitative financial models, the originator of the model may have licensed its use, and a fee may be required in addition to acknowledgment.
- Attribute paraphrased or summarized material - While this material does not necessarily meet the stated definition of plagiarism, it should be attributed to its rightful source. For example, a lengthy research report on General Motors may include summaries on Ford, DaimlerChrysler and Toyota that were written by other analysts, mostly to give some context to the GM analysis. Even in summarized format, these commentaries have been borrowed from others, and in a spirit of fairness, proper credit should be explicitly offered.
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